Your organization has just done an acquisition. It is prudent to consider the impact that this will have on the tax provision process and the technical issues affecting the provision in advance of the provision preparation process, as these can be complex matters that require time to properly address. A helpful insight to manage the process is to develop a checklist of the related, non-routine issues requiring consideration. Have a plan to address each item on the list in a timely fashion. While the issues will differ company by company, transaction by transaction, the following are ten common issues that you can use as a starting point.
1. Obtain the transaction documents and analyze the intended tax structuring – stock acquisition, asset acquisition, section 338(h)(10), disregarded entity elections? Ensure elections are timely filed. The form of the transaction will drive the accounting issues and tax basis for future filings, and it will affect which of the remaining items on this list are applicable to your transaction.
2. Consider the jurisdictional filing footprint of the acquired organization. Analyze:
- Permanent establishment and state and local nexus
- The impact on the historical organization’s state and local tax filings – issues such as instant unity, water’s edge elections, and the effect on filing group positions should be reviewed.
3. Taxes in purchase accounting:
- Identify and quantify uncertain tax positions to record the effects in deferred taxes and current tax account balances as applicable.
- Address the impact of contingent consideration on deferred tax accounting.
- Properly report seller indemnification agreements (without netting against related tax liabilities).
4. Analyze transaction costs. Amounts deducted on the books require analysis as to whether they are capitalized for tax as stock basis or asset basis or if they are tax-deductible costs. This can impact tax basis for purchase accounting.
5. Analyze net operating losses and other tax carryforward attributes:
- Sections 382 and 384 (when applicable), noting that states require separate analysis as to how and whether to apply federal rules.
- Ability to offset acquired attributes against income of historical group members. Wide variety of state and local rules require focus separate from federal result.
- Post-acquisition structuring may have significant effect on tax attribute utilization.
6. Analyze the impact of the acquisition on the organization’s positions on whether foreign subsidiary earnings are permanently reinvested or are anticipated to be repatriated. An acquisition can change the cash flow needs and plans, and prior analysis should be updated. Consider transfer pricing requirements. First inventory the intercompany transactions, and then consider the need for transfer pricing analysis and documentation.
7. Consider valuation allowance requirements for the acquired organization as well as re-assess the need for valuation allowances for the historical business resulting from changes driven by the acquisition.
8. Address plans for tax accounting method changes for the acquired entities and the impact on opening deferred tax balances and uncertain tax position reporting.
9. Determine the sources of data needed for the tax provision computation (general ledger, prior tax returns and workpapers, unique tax adjustment computations, etc.) and plan a process to obtain the data in a timely manner. This may require a short-term plan to initially, more manually, request and obtain the data, and a longer term plan for a more automated process to integrate the data collection and integration of the acquisition into the ongoing provision process.
10. Consider internal controls needed to manage the tax provision process in the acquisition year and beyond. Update tax process and key control documentation and testing procedures accordingly.
An acquisition can result in significant analysis and documentation in a financial reporting period above and beyond the typical process. Proper planning and an understanding of required resources is needed to allow for completion of this work to produce a complete, accurate and timely tax provision. Close coordination with the general ledger close process is critical, as the tax entries will be a last affecting purchase accounting after other purchase accounting entries are finalized.